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Cryptocurrencies have had a rocky road towards mainstream acceptance.
In 2017, the CEO of JP Morgan, Jamie Dimon, called bitcoin “a fraud”.
However in 2019, JP Morgan became the first US bank to successfully test its own digital coin.
The growth of digital currency has enthralled investors. Bitcoin, the world’s largest cryptocurrency by market cap, saw prices surge as high as USD$19,000 per bitcoin in December 2017 before dropping to around USD$7,000 in the following months. It is currently trading at over USD$10,000.
There is also considerable scepticism surrounding cryptocurrency among some governments and financial firms. For instance, on Tuesday a survey by the Royal United Services Institute think-tank and the Association of Anti-Money Laundering Specialists found that the illicit use of cryptocurrencies is a chief worry.
This month, Kraken – a San Francisco-based cryptocurrency exchange – became the world’s first cryptocurrency bank after securing a US bank charter that allows American investors to bank between digital assets and national currencies like USD. Recognised under federal and state law, Kraken will be the first regulated US bank to provide comprehensive deposit-taking, custody and fiduciary services for digital assets.
We chatted to Kraken’s managing director in Australia Jonathon Miller, about the regulatory road to becoming a bank and the trends they have observed in the use of cryptocurrency by businesses today.
What is cryptocurrency?
Investopedia defines cryptocurrency as “a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.”
Cryptocurrency is decentralised, which means that there is no central monitoring oversight and its safety is instead ensured by algorithm-based trust.
The first cryptocurrency was Bitcoin, launched in 2009, and since then thousands of alternative cryptocurrencies have been introduced.
Jonathon Miller, Kraken’s Managing Director in Australia, is bullish about its future significance.
“The future of finance is a multifaceted world of digital assets,” said Mr Miller.
Are Australian businesses using cryptocurrency transactions?
In 2018, Brisbane Airport became the first in the world to accept cryptocurrency payments, enabling travellers to make purchases with digital currencies such as Bitcoin, Litecoin and Ethereum at more than 30 retail and dining outlets located throughout the international and domestic terminals.
There is still a steep learning curve among Australian businesses when it comes to using and transacting with cryptocurrency. Nevertheless there has been growing interest amongst businesses in the fund management space in Australia.
“Financial institutions are more interested in cryptocurrency. Some more regulated industries, like superannuation funds, are more reticent,” said Mr Miller.
Moreover, there appears to be growing interest from new and tech-savvy investors.
“There are a huge amount of new entrants in the crypto space. People have found extra time during the pandemic,” said Mr Miller.
“People aren’t looking to spend more. It’s because people have extra time and are looking for alternate revenue streams.
“Millennials and sophisticated investors are very interested in crypto as an asset class.”
How has cryptocurrency affected corporate activity?
In August this year, MicroStrategy – a Virginia-based business intelligence software company – purchased $250 mn in bitcoin assets.
“Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximise long-term value for our shareholders,” said Michael J. Saylor, CEO of MicroStrategy Incorporated, in a statement.
“This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.”
Mr Saylor also lauded investments in cryptocurrency as a hedge against inflation, as the limited number of bitcoins available make it akin to a “digital gold”.
However there are persisting regulatory issues that stymie the uptake of cryptocurrency among businesses, such as how issued tokens from initial coin offerings (ICOs) are treated. While Australia’s regulator ASIC formally recognises crypto assets and issuers, there has been a regulatory divide internationally that has slowed mainstream adoption.
The different regulatory approaches taken across the world – from outright bans in China and South Korea to regulation by analogy in the US – mean that innovation and cryptocurrency activity can be difficult.
But the Wyoming Banking Charter given to Kraken in the US might indicate a turning of the tide.
“I think what we’ll see is a use of blockchain to facilitate all types of financial activity including fundraising. Maybe a digital security rather than an ICO.
“The idea of issuing an instrument that a user has control over an entity is an age old method. The frameworks will harmonise and we’ll see cryptocurrency in financial markets.”
What are the main barriers for cryptocurrency usage in Australia?
Whilst Australian ATO and AUSTRAC guidance on business cryptocurrency transactions is quite clear, slow global harmonisation of fintech regulation creates a blockade for the use of cryptocurrency in business transactions.
“Cryptocurrency is inherently global – and it forces regulators to think more globally. Fundamentally, international harmonisation around crypto regulations is one of the big things that could happen … I think it’s possible.”
When personal cryptocurrency is disposed of in Australia, it may be treated as a capital gains tax event. However profits from disposal as part of a business will be assessable as ordinary income and not as a capital gain.
Lisa Askenazy Felix, head of global tax at Kraken, highlighted that there are some key areas in Australian tax law that could be reformed.
“Digital assets also serve a growing need in today’s era of the remote workforce as a means to compensate employees. Yet the ATO’s 2014 ruling on the treatment of payment (even partial payment) in crypto makes this cost prohibitive for companies to do so.”
Felix also argues against the treatment of cryptocurrency as a fringe benefit where an employee receives cryptocurrency as remuneration instead of AUD as part of a valid salary sacrifice arrangement.
“It would benefit employment globally if the ATO would reconsider payment in Bitcoin to be treated as wages or salary. This would be provided the company withholds and remits taxes, just as it would with other forms of monetary wages, rather than imposing the more onerous FTB regime.”
This does not constitute financial advice. If your business is interested in cryptocurrency, you should consider seeking independent legal, financial and tax advice. Dynamic Business is not liable for any loss caused, negligence or otherwise, from reliance on the information provided in this article.